Fiscal Federalism and Demography
This article examines the effects of demographic change on federal, state, and local government expenditures in Germany to answer the question of whether demographic change will induce vertical fiscal expenditure imbalances. The authors present estimates of the impact of demographic change on public spending based on a decomposition of expenditures into twenty-nine categories (functions). Results suggest that demographic change will result in significant vertical expenditure imbalances between the federal and the subnational government sector as well as within the subnational government sector. In addition, the estimates show that the structure of expenditures by function has to be adjusted considerably to avoid deficits since demographically induced increases in expenditures in some important functions, such as pension payments, have to be counterbalanced by exploiting potential savings that arise from demographic change in other functions.
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